Current ratio or working capital ratio, Financial Econometrics

Assignment Help:

Current ratio (CA) or working capital ratio

CA = Current assets/Current liabilities (times)

Current ratio measures the short term solvency or liquidity; it signifies the extent to which the claims of short-term creditors are covered by assets. Current ratio is basically looking at the working capital of the company. Effective management of working capital ensures that organisation is running efficiently. This will ultimately result in increased profitability and positive cash flows. Effective management of working capital involves low investment in non-productive assets such as trade receivables, inventory and current account bank balances. Also maximum use of free credit facilities such as trade payables ensures efficient management of working capital.

Normal current ratio is around 2:1 however this varies within different industries. Low current ratio may indicate insolvency. High ratio may indicate not maximising return on working capital. Valuation of inventories would have an impact on the current ratio, as will year end balances and seasonal fluctuations.

The use of ratios

  • To compare results over a period of time
  • To measure performance against other organisations
  • To compare results with a target
  • To compare against industry averages

We will now look at some of the working ratios in detail and illustrate how they can be interpreted.


Related Discussions:- Current ratio or working capital ratio

Risk, Hsve s Finsncial Econometrics project that needs to be done. It invol...

Hsve s Finsncial Econometrics project that needs to be done. It involves fitting AR(1)-Garch(1,1) model to two series of log returns and copulas, forecasting and Risk calculation

Distinguish between debt finance and equity finance, Question 1: (a) A...

Question 1: (a) As a small island economy , Mauritius had to face a number of constraints in order to transform itself from mono-cop economy into a well diversified midd

What is over-capitalisation, Q. What is Over-capitalisation? Over-capi...

Q. What is Over-capitalisation? Over-capitalisation This is the opposite of over trading. It means a company has a large volume of inventories, cash balances and trade re

Financial markets and institutions , I have a case study to do for my fina...

I have a case study to do for my financial markets and institutions subject. I''ve been struggling with one of the questions. So I need help if possible, the question is "What do y

Commercia bank functions, list of those and their functions source of fund ...

list of those and their functions source of fund and how the sources are lend out?

Working capital cycle - cash cycle, Working capital cycle measures the time...

Working capital cycle measures the time between paying for goods supplied to you and final receipt of cash to you from their sale. It is desirable to keep this cycle as short as po

Find out the portfolio weight, Question You have a portfolio consisting...

Question You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 10.2%. Stock A has an expected return of 12% while stock B is ex

Masters degree to be financially feasible, If an MBA cost $35,000 and money...

If an MBA cost $35,000 and money can be invested to earn 7 percent, how much does the annual salary for a person holding a masters degree have to exceed that of other college gradu

What do you meant by overtrading, Q. What do you meant by Overtrading? ...

Q. What do you meant by Overtrading? When a company is trading large volumes of sales very quickly, it may also be generating large amounts of credit sales and consequently lar

Conservative policy for financing working capital, Q. Conservative policy f...

Q. Conservative policy for financing working capital? A conservative policy for financing working capital is one where short-term finance is usedto fund: A : All of the flu

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd